Wednesday, June 27, 2012

The dust is settling on the U.S. Supreme Court’s decision to nullify Montana’s 99-year old law that banned political contributions by corporations. But the controversy is not settled, since the majority Justices’ interpretation in what has been called Citizen’s United IIis that since corporations are ‘persons’ in law, they should be protected by First Amendment free speech, regardless of its affect on the functioning of our democracy.

Corporations are not persons by any standard definition of personhood. Corporations are not even mentioned in the Constitution. They in fact more closely fit the socialist model, with a ruling hierarchy comprised of its CEO, a compliant Board of Directors that is owned by the public at large. And that ‘hierarchy’ wields much more power for good or harm that an individual ‘person’.

Although dictionaries define a person as a “human being or organization with legal rights or duties”, a corporation is really a state-within-a-state, since it is really a socialist system in which “producers possess both political power, and the means of producing and distributing goods”. And now corporations have almost unlimited means to increase their political power.

It even more closely resembles an oligarchy, as current law and usage enshrines control not with shareholders, but its executives who make the day-to-day decisions and long term plans. This is exactly the model of such socialist states as Russia and China, with their single-party rule.

So under what definition should corporations be protected by First Amendment freedom of speech? Persons are not protected by the so-called Free Speech Amendment if they cause damage to other persons. The 99-year old Montana law just struck down by this Supreme Court protected free speech by curtailing what corporate power was doing to their state.

Specifically, it was holding all the political power, without any responsibilities towards either its employees or Montana’s citizenry at large. Montana’s 99-year old law upheld by its State Supreme Court was meant to limit corporate power, when it literally owned state politicians.

“Even if I were to accept Citizens United,” said Justice Breyer’s dissenting opinion in Citizen’s United II, “this court’s legal conclusion should not bar the Montana Supreme Court’s finding, made on the record before it, that independent expenditures by corporations did in fact lead to corruption or the appearance of corruption in Montana. Given the history and political landscape in Montana, that court concluded that the state had a compelling interest in limiting independent expenditures by corporations.”

Chief Justice Mike McGrath of the Montana Supreme Court, writing for the majority in its 5-to-2 ruling, stressed that the state’s experience of having its political system corrupted by corporate interests early in the 20th century justified the ruling.

“At that time,” Chief Justice McGrath wrote in the New York Times article, “the state of Montana and its government were operating under a mere shell of legal authority, and the real social and political power was wielded by powerful corporate managers to further their own business interests. The voters had more than enough of the corrupt practices and heavy-handed influence asserted by the special interests controlling Montana’s political institutions.”

In other words, there is good reason that such corporate power has to be curtailed in a democracy. Quite simply the one-voice, one-vote principle that makes a democracy work is nullified. That is why Montana had continued to enforce its Corrupt Practices Act. It had robber barons of the first magnitude with unlimited financial resources that could buy almost any politician.

Before a referendum banned corporate contributions in 1913, Butte copper barons openly bought officer holders with massive bribes. One corporate bigwig, W.A. Clark, flagrantly handed out gobs of cash to state lawmakers, who then in turn, elected him to the United States Senate, said a history of the subject, according to the small-town Montana Havre Daily News.

“In a refreshing break from the stately language used in court decisions, Montana Chief Justice McGrath quoted humorist Mark Twain as saying Clark "has so excused and so sweetened corruption in Montana that it no longer has an offensive smell."

“Sick of this skulduggery, in 1913, voters approved a referendum banning corporations from making donations and barring politicians from accepting them. They then changed the law to demand that people, not the state legislature, would elect U.S. Senators. The rest of the country followed suit in seven years.”

So, the U.S. Supreme Court is in essence decreeing a return to the old system of political patronage, where corporations and their wealthy supporters elect our representatives, instead of ordinary citizens. But instead of looking out for the welfare of all Americans, it will be their richest, profit-seeking supporters who benefit.

Tuesday, June 26, 2012

Sales of newly built, single-family homes rose 7.6 percent to a seasonally adjusted annual rate of 369,000 units in May, according to newly released data from HUD and the U.S. Census Bureau. Why are new-home sales important? Because they indicate lower housing inventories, as fewer distressed homes enter the market. Consequently home prices are beginning to rise with the Case-Shiller Home Price Index the latest to show improving housing values.

The S&P/Case-Shiller 20-city composite existing-home index for same-home sales gained 1.3 percent with 19 out of 20 cities registering gains, to take the year-on-year drop from 2.6 percent to 1.9 percent.

Graph: Calculated Risk

Of the 20 cities measured, only Detroit took a step backward, with a 3.6 percent reversal. Even Atlanta, where prices were 17 percent below year-ago levels, enjoyed a 2.3 percent monthly increase. Where are prices increasing the fastest? In Florida, Arizona, and California, the heart of the housing bubble.

“It’s been a long time since we enjoyed such broad-based gains,” said David Blitzer, chairman of the index committee at S&P. “While one month does not make a trend, particularly during seasonally strong buying months, the combination of rising positive monthly index levels and improving annual returns is a good sign.”

New-home sales are 19.8 percent higher compared to one year ago. Still, the sale of new homes remains far below its pre-recession peak and reflects an industry trying to dig out from its worst slump in modern times, mainly the huge inventory of unsold existing homes. But the good news is that existing-home inventories are declining to more historical levels, which boosts both prices and new-home construction, as we said.

Graph: Calculated Risk

"May's sales report is a welcome sign that the market has returned to a more solid growth path following lackluster reports in March and April, and is in keeping with our expectations for continued, steady improvement through the end of this year," said NAHB Chief Economist David Crowe. "While the current sales rate remains low by historical standards and continues to be constrained by challenges related to credit availability for builders and faulty appraisals, the ongoing decline in the month's supply of new homes will necessitate additional construction in certain markets going forward."

Regionally, new-home sales were mixed in May. While the Northeast and South posted solid gains of 36.7 percent and 12.7 percent, respectively, the Midwest and West showed respective declines of 10.6 percent and 3.5 percent.

Thursday, June 21, 2012

Builder confidence in the market for newly built, single-family homes gained one point in June from a slightly revised level in the previous month to rest at 29 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This is the highest level the index has attained since May of 2007.

“This month’s modest uptick in builder confidence comes on the heels of a four-point gain in May and is reflective of the continued, gradual improvement we are seeing in many individual housing markets as more buyers decide to take advantage of today’s low prices and interest rates,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB).

Graph: Calculated Risk

Those low interest rates are spurring South Coast existing-home sales, according to Gary Woods’ May MLS report. May marked the third month in a row that sales of homes topped 100 going up to over 130 for the Home Estate/PUD market. The median sales price also shot up to about $825,000 for the month, rising from $756,300 in April. The numbers of escrows also rose in May to about 170 from 142 in April with the median list price on those approximately 170 opened escrows going up from $789,000 in April to about $840,000 in May.

Annual South Coast sales are up from 340 to about 475, a 40 percent rise in a year while the median sales price is down a little from $810,000 last year to about $795,000 for a 2 percent drop. Even more impressive is the surge in escrows, up from 405 to about 605 for a 50 percent upswing with the median list price on those escrows going down 10 percent from $879,000 to about $800,000.

Why? It’s no secret that interest rates have dropped below 4 percent for several months now, and that makes housing all the more affordable.

Graph: Calculated Risk

But there is still a serious backlog of delinquent mortgages, according to the Federal Housing finance Authority’s Q1 report. It’s no surprise that Florida and Nevada lead the pack in delinquent loans, but the fact that New Jersey, Illinois, and New York homeowners are in difficulty is surprising. The largest backlog of foreclosures is in the states with judicial foreclosures, which can take up to one year to complete. Trust Deed states like California avoid the courts for the most part in foreclosure proceedings.

Wednesday, June 20, 2012

Why are the fears of a declining social safety net for social security and Medicare increasing? Barron’s Gene Epstein recently warned of dire consequences for future generations as some 78 million baby boomers begin to retire. .

“In short, the future has arrived, and it doesn't look pretty,” said Epstein. The boomers in their 60s and the legions after them will put pressure on federal programs that support the elderly for years to come, according to projections by the nonpartisan Congressional Budget Office. The surge will fuel a process that eventually renders these programs too expensive to sustain. More ominously, the federal budget's burden of eldercare will get heavier, not lighter, even after the boomers leave the scene completely.”

But Epstein’s cure is really a veiled push for Republican Paul Ryan’s budget plan, which is more of the same ideology—tax and spending cuts that redistribute even more wealth from taxpayers to the wealthiest. It is part of their austerity agenda, which will continue to increase the budget deficit, as is happening in Europe.

We know when the current worries over baby boomers retirement impacting social security and Medicare began. It’s told in The Price of Loyalty, Bush Treasury Secretary Paul O’Neill’s book with Ron Suskind. G W Bush and Karl Rove decided to use the four years of Bill Clinton’s budget surpluses to fund tax cuts and the two wars GW and Dick Cheney were planning, instead of protecting social security and Medicare.

The problem is that it also ‘funded’ the largest budget deficits since World War II, when we add in costs of the Wars on Terror and Great Recession. Suskind’s book documents the discussions that led to the second tax cut that mainly benefited corporations and stockholders, when President Bush had second thoughts about it. "He asks, 'Haven't we already given money to rich people? This second tax cut's gonna do it again,'" said Suskind.

"He (Bush) says, 'Didn't we already, why are we doing it again?' Now, his advisers, they say, 'Well Mr. President, the upper class, they're the entrepreneurs. That's the standard response.' And the president kind of goes, 'OK.' That's their response. And then, he comes back to it again. 'Well, shouldn't we be giving money to the middle, won't people be able to say, 'You did it once, and then you did it twice, and what was it good for?'"

It’s all there in The Price of Loyalty, and was the reason O’Neill was relieved as Secretary of the Treasury in 2002. He objected to returning the hard-won surpluses to GW’s richest supporters, whether individuals or Cheney’s Military-Industrial buddies such as Halliburton or Kellogg, Root and Brown that would most benefit from the Iraq invasion (i.e., oil and military supplies).

“The CBO report, prepared at Chairman Ryan’s request, shows that Ryan’s budget path would shrink federal expenditures for everything other than Social Security, Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and interest payments to just 3¾ percent of the gross domestic product (GDP) by 2050. Since, as CBO notes, “spending for defense alone has not been lower than 3 percent of GDP in any year [since World War II]” and Ryan seeks a high level of defense spending — he increases defense funding by $228 billion over the next ten years above the pre-sequestration baseline — the rest of government would largely have to disappear.”

The Clinton surpluses, the result of a record 10 years of uninterrupted economic growth that was the longest growth cycle in U.S. history, had been projected to ultimately pay off all government debt accumulated since World War II. President Clinton predicted the increase in the expected surplus—some $1.9 trillion—meant the government could be debt-free by 2010. But that depended on a whole lot of assumptions, such as continuing his cutbacks in military and other government spending. But the dot-com recession followed, causing some $4 trillion in stock losses alone.

In fact, all of the Bush tax cuts cost taxpayers $1.85 trillion while government spending was boosted 23 percent in his first four years, according to Brookings economist William Gale, who worked on the Council of Economic Advisers under President George H.W. Bush. And just 3 million net jobs were created during the Bush years.

But there is an alternative that will help to save our safety net. It is to return to Clinton-era policies that created so much wealth in the 1990s—raising tax brackets to their prior levels, cutting back on military and other government spending, and putting back the pay-as-you-go rules of that era that didn’t allow Congress to spend more than it taxed. So it turns out Republicans have been the biggest spenders.

Saturday, June 16, 2012

This may be the brashest of predictions. Can residential real estate prices actually be recovering? Yes, as housing inventories decline. The National Association of Realtors just reported on the national level, inventory of for-sale single family homes, condominiums, townhouses and co-ops declined by -20.7 percent in May 2012 compared to a year ago, and declined in all but two of the 146 markets covered by REALTOR.com.

This is while the median age of the inventory fell -9.78 percent on a year-over-year basis last month, and the median national list price increased 3.17 percent last month compared to May 2011.

Graph: Calculated Risk

“Signs of recovery are evident in a growing number of markets that were once the epicenter of the housing crisis, and older industrialized areas in the Northeast and the Midwest are showing emerging signs of weaknesses,” said NAR’s press release. “For example, the recovery process that began in Florida approximately one year ago has since spread to Phoenix and most recently California. At the same time, markets such as Reading, PA, Allentown, PA and Milwaukee, WI continue to lag behind the rest of the market.”

Another sign of the housing recovery is that Mortgage applications increased 18.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA). This is part because of the new Fannie Mae/Freddie Mac HARP 2.0 loan modification program, which Fannie Mae predicts could affect as many as 9 million mortgage holders.

Graph: Calculated Risk

“Mortgage application volume increased sharply last week. The increase was accentuated due to the comparison to the week including Memorial Day, but the level of refinance and total market activity is the highest since the spring of 2009,” said Michael Fratantoni, MBA's Vice President of Research and Economics. “Refinance volume increased as borrowers were able to lock in at mortgage rates below 4 percent, and purchase application volume was its highest level in over six months. HARP volume has been steady in recent weeks at about 28 percent of refinance applications.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.88 percent from 3.87 percent, with points decreasing to 0.43 from 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. But rates are actually lower in states like California, where the 30-yr fixed conforming rate has fallen to 3.50 percent, with zero points origination fee.

According to the MBA, HARP activity is increasing at the same rate as overall refinance activity, which means long waiting periods for refinances in particular. Some lenders are saying it takes up to 16 days for underwriting approval.

The so-called echo boomer generation, children of baby boomers are beginning to provide some of the increased purchase activity. There are approximately 62 million echo boomers in the U.S. Also called "millennials," echo boomers are currently ages 17-31. According to the 2011 National Association of Realtors Profile of Home Buyers and Sellers, younger home buyers - those ages 18-34 - represent 31 percent of all recent home purchases.

In other words, it looks like 2012 is the year real estate will begin to recover. With 4.5 million jobs created or retained since 2009, the demand for jobs growing, according to the Bureau of Labor Statistics JOLTS report (with 3.5 million job openings), and affordability never higher, housing might be finally leading us out of the Great Recession.

Thursday, June 7, 2012

The May employment report showed the economy slowing, but pundits may be jumping to conclusions. For though the unemployment rate rose to 8.2 percent in May from 8.1 percent the prior month, that was because 642,000 more began looking for work in the Household Survey that includes the self-employed. This is while there was a 422,000 jobs increase in the same Household Survey when seasonally adjusted.

However payroll jobs in the separate Establishment Survey (i.e., nonfarm payrolls only) rose just 69,000, following increases of 143,000 in March and 77,000 in April, when seasonally adjusted. But that was because 718,000 additional hires were subtracted in the seasonal adjustment, and governments lost another 13,000 jobs.

Graph: Calculated Risk

We have been here before. Last summer’s scare came when the Bureau of Labor Management had to revise from 0 to 57,000 jobs created in August, and added an additional 42,000 payroll jobs in July when revised. This is because of the so-called seasonal adjustments. They are an attempt to figure out what is above or below the normal seasonal hiring rate for that time of year, as we have said in the past. Students usually flood the jobs market during summers increasing payrolls, for instance. But it is not an exact science, needless to say.

Meanwhile, both the industrial and service sectors are expanding robustly, and the Institute for Supply Management (ISM) surveys say they will hire more workers. The ISM non-manufacturing overall composite activity component, though held down by slowing employment growth, still came in slightly higher than expected at 53.7. New orders rose 2 points to 55.5 to indicate accelerating monthly growth. Monthly growth in backlogs is the same as in April, at 53.0 which is a solid rate for this reading, said Econoday.

Graph: Econoday

Even better news was the ISM Manufacturing Survey. The ISM's new order index is also up nearly 2 points to 60.1 for the strongest rate of monthly growth since April last year. New orders will trigger wider activity in the months ahead. For May, production growth slowed but remains healthy while employment growth in the factory sector is steady and healthy. Inventories are coming down even as new orders pick up, a combination that points to the need for inventory building which is a solid positive for hiring as well.

Graph: Econoday

Lastly, the recent sell-off in the stock market and rising problems in Europe are not rattling the U.S. consumer whose sentiment is clearly stronger than it has ever been during the recovery. The U. of Michigan consumer sentiment index jumped to 79.3, up nearly 3 points from April and up 1.5 points from the mid-month reading. This last comparison, which puts the index at an implied 80.8 over the past two weeks, indicates that the rise in optimism is now picking up intensity, according to Econoday.

Graph: Econoday

But does all this mean more jobs? Both ISM surveys showed a slight drop in those planning to hire more workers, but both employment components of the surveys were still above 50 percent, meaning the majority of supply managers reported increased hiring.

So because the seasonally adjusted numbers are notoriously inexact, we cannot be sure that an economic slowdown is even happening. It could be due to seasonal fluctuations that are normal for any business cycle.

Wednesday, June 6, 2012

Mortgage rates are the lowest since the Mortgage Bankers Association survey began in the 1970s, at 3.91 percent for the conforming 30-year fixed rate, but actually lower with many lenders. I am seeing rates as low as 3.25 percent for the conforming 10-year fixed ARM that is adjustable for the remaining 20 years, with 0 origination points.

Graph: Calculated Risk

This hasn’t boosted mortgage applications much, however, as the MBA’s Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 5.5 percent but is 14.4 percent above April 2011. The data reflects contracts but not closings.

NAR chief economist Lawrence Yun, said a one-month setback in light of many months of gains does not change the fundamentally improving housing market conditions.

“Home contract activity has been above year-ago levels now for 12 consecutive months. The housing recovery momentum continues,” he said. Existing-home sales seem to show momentum, as existing sales rebounded in April, helping to set aside some of the worries about upwardly skewed seasonally adjusted data during the atypically warm winter. Sales posted a 3.4 percent increase, following a 2.8 percent decrease in March. Gains were solid across regions.”

Graph: Calculated Risk

The median price of existing homes shot up 10 percent in April as well, as housing inventories have declined to 6.6 months. And that is at the current slow sales pace. Should it pick up this year, inventories could decline to their historical low of 4 percent giving a further boost to prices.

Graph: Calculated Risk

This is because total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April.

And we are seeing larger price rises in the FHFA price index of homes with Fannie Mae/Freddie Mac owned mortgages. Home prices climbed 1.8 percent on a seasonally adjusted basis in March, said the Federal Housing Finance Agency. Year-on-year, prices rose 2 percent. For the first quarter as a whole, prices rose 0.6 percent from fourth-quarter levels. "Increased affordability and a somewhat smaller inventory of homes for sale are positively impacting house prices," said Andrew Leventis, FHFA principal economist. The FHFA is a purchase-only index based on transactions bought or guaranteed by Fannie Mae or Freddie Mac, as we said.

Lastly, default rates continue their decline, meaning fewer REO (bank-owned) properties are coming on the market. As far as delinquencies, MBA Chief Economist Jay Brinkmann says we are "halfway back" to normal of around 5 percent historically, though this does not include the "in foreclosure" bucket; loans in foreclosure are still near record highs. We anticipate further declines in both default and foreclosure rates, as HARP 2.0 Fannie/Freddie loan modification activity that ignores negative equity is going through the roof. Some lenders are reporting up to 18 days to initial underwriting of submissions, because of the huge backlog.

The Mortgage Banker Association's National Delinquency Survey (NDS) covers about "42.9 million first-lien mortgages on one- to four-unit residential properties" and is "estimated to cover around 88 percent of the outstanding first-lien mortgages in the market," said the press release. This gives about 5.8 million loans delinquent or in the foreclosure process.

So increased affordability, combined with declining inventories seems to be finally spurring homebuyers to come out of their rentals (or parents’ households) to make that most important of investments—a home of their own.

Tuesday, June 5, 2012

The debt ceiling debate is about to begin again, and House Speaker Boehner has said he will continue to press for more tax cuts without raising additional revenues, reviving the possibility of more budget gridlock and credit downgrades. "I believe that raising taxes at this point in our recovery is a big mistake," Boehner told reporters. "At a time when we're trying to help small businesses create jobs, this proposal would kill jobs."

But it is a mistake to cut taxes without raising revenues. We know GW Bush’s tax cuts enacted in 2001 and 2003 to revive an economy flattened by the dot-com bubble bust have cost plenty. And we know what happened to all that money saved by corporations and individuals.

Not much. Just 3 million jobs were created during Bush’s 8 years, household incomes did not even keep up with inflation, and yet corporate profits are up more than 14 percent as a percentage of GDP—the highest in history.

So most of the money flowed to corporations—who are currently hoarding more than $2 trillion in cash—and the top 1 percent income earners who benefited most from the tax cuts. And since the top 1 percenters spend less of their money than the 99 percenters, much of it is being held in banks that have almost $1 trillion in excess ‘zero sum’ deposits that aren’t being put to work to revive this economy.

Graph: CBPP

Then what would really put all that cash back to work to grow jobs and the economy? We know the answer is to invest more money to grow the future, but how without even more debt? Dr. Robert Shiller of Irrational Exuberance fame, and Cornell Professor Robert Frank have written wonderful New York Times Op-eds on just how to do it.

It’s almost absurdedly simple in principle. Dr. Shiller says that William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Nobelist Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.”

“It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged.”

And Professor Frank disputes austerity proponents who say governments can’t spend beyond their means indefinitely, any more than businesses or families can. He says “It’s a fair statement if we’re talking about the long run. But in the short run, it’s utterly false…Consider an indebted family that must decide whether to borrow $5,000 to install additional insulation in its attic, a project that would reduce its utility bills by an average of $100 a month and require loan payments of $50 a month. In the short run, obviously, the project would increase the family’s indebtedness. But can there be any doubt that the family would be better off, in both the short and the long run, by going ahead with it?”

In other words, one must spend money to make money, and it can be done in a balanced way. That also means it can be done with either public or private monies that gives a public benefit, such as making up the $2 trillion deficit in infrastructure repairs. And if private business won’t invest sufficient funds, as at present, then public monies must be used.

Graph: CBPP

We also know that tax cuts don’t create jobs or spur growth by themselves. The Bush tax cuts are the most current example; in fact helped to cause the Great Recession. For much of the excess profits were spent on market speculation—especially in subprime loans and payday lending to the poorest among us—that caused the housing bubble.

An excellent book by Gary Rivlin, Broke, USA: From Pawnshops to Poverty, Inc. -- How the Working Poor Became Big Business, documents that “Poverty Inc. was a roughly $150 billion-a-year industry at its peak, Rivlin calculates, after totting up revenue at pawnbrokers, payday lenders, money-wirers, rent-to-own operators, tax preparers who offer instant tax “refunds,” subprime credit-card providers, subprime-mortgage lenders and all the rest”, according to a Bloomberg News review.

We also know the cost of the Bush tax cuts, which had to be paid for with taxpayer dollars, since they were one of the major causes of the deficit due to the lost revenues at a time we were paying for 2 wars.

Graph: CBPP

It’s more than $3 trillion to date, according to the CBPP, and would cost taxpayers another $3.6 trillion if extended over the next 10 years. In fact, if the Bush tax cuts were allowed to ‘sunset’ this year, the federal budget deficit would stabilize. So it makes no economic sense to advocate tax cuts without revenue enhancers, and there are plenty, from closing loopholes, to certain interest exemptions. So austerity is not the answer—neither here nor in Europe.

Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.